BY MARK SEBASTIAN 

July 25, 2023

The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

On Monday, the Invesco QQQ Trust (Ticker: QQQ) began trading with its new composition.

This has changed the index to some degree.

Prior to the rebalance, the top 7 market cap names in the world made up for more than 55% of the ETF; they now account for about 47%.

In addition, Broadcom Inc (Ticker: AVGO) is now 3% of the index, bringing a huge but not mega cap player into the pricing of the index.

Heading into the rebalance, we positioned ourselves to take advantage of the trading around it.

On Wednesday in Nitro Trader we set up a trade that was long the DIA and short SPY as a pair.

You can see how quickly the trade came together – I circled the day we entered and arrowed the exit:

As you can see the trade worked out well.

In addition to this trade, I set up two more in my Nitro Trader Quarterly Call, the best of which was Applied Materials, Inc. (Ticker: AMAT) vs Nvidia Corp (Ticker: NVDA).

Again, you can see the trade developed and was exited in 2 days:

While the rebalance will still present future opportunities,  the discussion around this event will be taking place in our trading service chats only.

But here’s the good news … this is not the only big event I expect this year.

I have made reference to the “Gamma Bomb” that is heading our way.

I believe it is still coming; however, the conditions needed to put the bomb together have not formed yet.

To remind you, the SPX options are trading so much, that a similar set up to the XIV Volpocolypse of 2018 is forming:

Here is what happened to XIV:

To get our “Gamma Bomb” …

We are going to need to see two things primarily.

The first is easy to understand – I want to see the VIX at 12 for an extended period of time.

I believe we are heading there shortly.

The second piece involves volume in SPX options. We are not there yet.

While I cannot get into exactly what I need to see, we are not far off.

At this point, it’s looking like this will happen in the fall.

But … I STRONGLY believe it’s still going to happen.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian